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Dependency on China: New Business Strategies and an Opportunity for Puerto Rico

By on May 14, 2020

(Juan J. Rodríguez/CB)
(Juan J. Rodríguez/CB)

By Felix E. De Jesus, Adjunct Professor of Global Management, Leon Hess Business School, Monmouth University, New Jersey

The tectonic plates of the world economy and its convoluted intermesh have been shifting underneath our feet for several years now, but the crisis caused by the coronavirus pandemic has accelerated that process. Crises for unknown reasons, have a way of bringing to the surface anomalies ordinarily ignored in good times by strategists and business executives. It is of common knowledge that many companies are quickly developing pandemic plans for the future – but if that’s all they are doing they’ll be missing a critical lesson from this crisis: “don’t put all your eggs in one basket” – the epicenter of this analysis.

Shifting of Tectonic Plates

High level trade officials and business executives from around the world are quickly rewriting strategies to react to the crisis and position businesses for a new normal. For decades international corporations have been moving production wherever it is most efficient and less costly, a basic concept under globalization. The search for low-cost producers has moved operations out of the United States and its territories to countries many miles away but their destination has been primarily China.

The current health crisis brings into focus judgement and decision-making by high level leaders. A basic investment principle is an essential element in the evaluation of factors contributing to this crisis: production diversification. Without getting too technical on diversification strategies, international corporations diversify production to simply reduce cost. This has been the driving force behind investing in China along with the gigantic size of its labor market. But broad global research demonstrates that China is no longer the lowest cost producer in the world, that strategic advantage belongs now to India.

Chinese government officials recognized this fact according to Neil Irwin in an article published by the New York Times on April 19, 2020: “China has reoriented its economic strategy, aiming to be not a low-cost manufacturing hub for the world but the maker of technologically advanced products like aircraft and telecommunication equipment.”

In a convincing way the coronavirus crisis has demonstrated that a cost reduction business strategy is no longer the dominant force behind diversification, the availability of products and its timely delivery is equally important now. The panic generated in the United States as health institutions scrambled to get critical supplies from China to face the pandemic was deeply disturbing. The delay in distribution caused by China, being the epicenter of the pandemic, troubled leaders around the world and convinced decision-makers to consider other distribution alternatives, when this issue turned a health crisis into a bigger social crisis.

Geoff Colvin writes in a May article for Fortune Magazine that “As businesses respond to this grand-scale reordering of their world, some implications are already clear – they’ll diversify supply chains beyond China when demand returns.” Therefore, it is obvious that tectonic plates would be shifting from globalized to regionalized distribution systems to meet customers’ demands: the new normal.

An Opportunity for Puerto Rico

The pharmaceutical industry for many decades has been one of the pillars of the Puerto Rican economy and an exclusive exporter of many products to the United States. But when the U.S. Congress repealed Section 936 tax incentives in 1996 and they began planning for NAFTA, the manufacturing of medical products in Puerto Rico was reduced significantly. Thousands of good paying jobs were transferred to several countries in Asia, but overwhelmingly to China.

It is important to recognize that the change from global to regional distribution systems, proximity to the United States and its highly trained labor force, makes Puerto Rico again a very attractive place for American health-related industries to expand their operations.

The U.S. Congress and the Trump Administration are seriously considering it, according to Congresswoman Nydia Velazquez. In an interview on May 6, 2020 with El Nuevo Día Miss Velazquez said, “the United States depends almost in its entirety on China, India, Singapore and Ireland for health products, countries far away from the U. S., that needs to change.” Miss Velazquez also indicated that “she participated in a conference call with officials from the Labor Department of the United States where it was mentioned that preliminary conversations were taking place with high level government officials and business executives in Puerto Rico about the possibility of bringing back the production of more health products to Puerto Rico.”

The consensus seems to be that attracting foreign pharmaceutical investments to the island is in the best interest of both the United States and Puerto Rico.

What is needed is coordinated high-level leadership of government officials and business executives to make it happen.

De Jesus’ research revolves around the dynamics and challenges of leading global corporations, and includes extensive experience in international manufacturing.

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